AB1201: Financial

Management

Course Wrap-Up

By: Angie Low

Course Wrap-up Review of Topics
Congratulations! You have completed all the
contents of this course and learnt many concepts in
finance.
Lecture 1: Overview of financial management
Goal of financial management is to maximise shareholder
wealth
Lecture 2: An in-depth look at the concept of time
value of money
CF1 CF2 CFN
Value
(1 r)1 (1 r) 2
...
(1 r) N

2
Course Wrap-up Review of Topics
Lecture 3: The determinants of interest rates
r = r* + IP + MRP + DRP + LP
Lecture 4: Introduction to bonds and how to value
bonds and determine yields
T
Coupon Par
Bond Value (1 YTM ) (1 YTM)
t T
t 1

Lecture 5: Relation between risk and return

portfolio theory and CAPM
ri = rRF + (rM rRF)bi
Lecture 6: Stocks and their valuation

Dividendst D1
P0 , P for constant growth
(1 rs ) t (rs g )
0
t 1

3
Course Wrap-up Review of Topics
Lecture 7: Weighted average cost of capital
WACC = wdrd(1-T) + wprp + wcrs
Lectures 8 and 9: Capital budgeting
N
CFt N
CFt
NPV 0
t 0 ( 1 r )
t
t 0 (1 IRR)
t

Lecture 10: Optimal capital structure and leverage

bL = bU[1 + (1 T)(D/E)]
Lecture 11: Distributions to shareholders

4
Back to the Beginning: What is Financial Management?
Studies how companies conduct their businesses in order to
maximise value.
Which Financial markets
Investment
assets to policy (L3)
invest in? (L7, 8, 9)

What is value? Financing How will

Maximise policy we pay for
(L2 - L6) value
(L10) the asset?
(L1)

Dividend What to do with

policy the earnings
generated by
(L11)
assets?

5
 Financial Markets (L3)
Adjust WACC
for risk of CF
T
Coupon Par
Bond Value N N
t 1 (1 rd ) (1 rd ) T CFt CFt
NPV
t

, 0
t 0 ( 1 r ) t 0 (1 IRR) IRR > Risk-
t t

rd = r* + IP + MRP + DRP + LP adjusted WACC

WACC = wdrd(1-T) + wprp + wcrs

Maximise LT value of shares

Dividendst
P0 Investment
t 1 (1 rs ) t
policy
CAPM: rs = rrf + (rm rrf)b (L7, 8, 9)

Financing
Value of asset = PV of all future CFs Maximise
Maximise policy
discounted at aWhat is value?
rate commensurate value
shareholders
with the risk of(L2the CFs
- L6) (L10)
wealth
(L1)
CF1 CF2 CFN
Value ...
(1 r) (1 r)
1 2
(1 r) N Increased debt
Increased default risk
r is minimum required return given Dividend Increased profitability
the risk of the CF policy Increased financial risk
(L11)
Hamada Equation:
Shareholders preference for
bL = bU[1 + (1 T)(D/E)]
dividends versus capital gains

6
Course Wrap-up Review of Topics
Mission Accomplished? We hope
that you can
understand fundamental concepts in finance
such as shareholder wealth maximisation, risk
and return, CAPM, capital budgeting, etc.
solve problems about time value of money.
apply the concept of time value of money to
different finance topics such as bond and stock
valuation and also project evaluation.
understand how companies invest, raise capital,
and distribute earnings in order to maximise
shareholders wealth.
7